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Economy

The Macro Trumps The Micro

I write at Yahoo: The Macro Trumps The Micro

You can’t buy stocks on merit anymore. You can do the most beautiful analysis about a company that owns a toll bridge, and how many cars pass through it every day, and how they can increase the toll fees every year by 10%. And how there is this airport proposal which, when cleared, will dramatically increase toll fee collections. Finally that the contract with the government guarantees a 20% return on investment.

And all of this analysis tells you that the stock should be worth five times the current value in a few years. Yet, it all amounts to nothing when suddenly, the government decides not to allow any toll fee increases because of the bad political mileage they are getting for not keeping onion prices in check. And then the government runs out of money because of profligate spending on random other causes, and investment flows into the country stop because no one in power can take a decision anymore, and the powers decide to tax everyone they earlier hadn’t taxed. To gather more money they introduce special taxes on toll collections that crimp margins further. Adding even more misery is that the rupee-dollar equation has changed by 30%, creating a huge gap in the repayment of loans borrowed in dollars. Something that happens in Spain causes a foreign company to go bust, which it turns out was a key shareholder in the stock — their liquidation floods the market with shares and in turn, destroys the stock price.

Spain, Government finances, rupee-dollar or political problems are not something you ever would factor into an analysis of a company whose only business was to let cars go over a bridge and collect toll. You’ve just been trumped by the macro.

The macro, in my mind, is the broad area that comprises macroeconomics, like the European debt crisis or the U.S. housing slump, which has an indirect but substantial impact on stocks that otherwise seem unlinked. The micro, on the other hand, is directly related to the company you want to buy — sales, profits, business prospect or market share. Investing through the micro has been a preferred path for many; for instance the rural story in India is about FMCG and motorbikes. But the macro now seems to have added itself as a parameter, almost like an uninvited guest, so now you have to think of FMCG, motorbikes and potential Greek default.

Crude oil prices used to change with supply or demand imbalances. It’s no longer just about supply and demand; even large countries are buying crude as an investment, sometimes even hiring ships to store them in the open sea on anchor — when the time is ripe, they will sell, they think. Much of that is fuelled by cheap loans given to banks and financial institutions, in some kind of "quantitative easing" which to the banks sounds like, "heads I win, tails you lose". Another macro that trumps the micro.

The trouble in Europe is turning out to be so large that nearly every statement that involves looking forward into the markets ends with a disclaimer like "Will not apply if Europe’situation deteriorates". How Greece affects a company selling quilts in Andhra Pradesh isn’t apparent now, but it will be in hindsight when the bad stuff does hit the fan, prompting you to wonder, "Now why didn’t I anticipate that?" The answer is that you simply can’t, just like you don’t think of whether the metal wires holding up your elevator are strong enough to take you up.

And what’s happening now is that the picture is all about posturing and anticipation rather than the fundamentals. Housing prices have fallen? Well, the market will now go up, because they believe that the authorities will introduce another round of "quantitative easing". The rupee fell some more? Oh, the RBI will protect it. The words that powerful people use in their carefully rehearsed statements tend to roil markets — so the powerful people try to use words to manipulate markets in the direction they want, rather than following those words up with action. It’s a world with financial systems that are of such stupendous size that even a tiny problem with "confidence" can rattle entire countries. Case in point: Spain’s bank deposits fell by 31.44 billion Euros in just April, on the fear that like Greece, there may be the need to invest away from the local economy.

You wouldn’t be alone wondering if the macro impact remains an unfounded fear or is really a train wreck in slow motion. The sane reaction is to stay out of it until there is more clarity, which unfortunately exacerbates the crisis — to the extent that certain governments, including India’s, believe that things would be perfectly fine if we simply didn’t have access to bad news.

But news has a way of finding its way home, and there’s no sense pretending that we are unaffected or, in investment parlance, "uncorrelated". The reasons to buy companies or sell them must include a check on the "macro". The rupee creates a problem for everyone if it slides so much (more than 20% in a year). The government’s lack of tax collections and affinity for overspending will result in their taking on even more debt from the market; thus impacting the borrowing costs of your company. The European equation is an unknown-unknown — we don’t even know how much a "contagion" will spread, should the bad stuff hit the fan.

It’s no longer about companies or places or people anymore. The macro is today a much bigger factor. And that is indeed sad.

  • feltra says:

    Sometimes I think that the “powers that be” (and probably the un and under-informed retail folks too) unwittingly play the “yellowstone effect”. (http://www.dnaindia.com/money/report_yellowstone-effect-lets-put-our-hands-together-and-welcome-crisis_1600570)…
    Desperately trying to eliminate every single “small crisis” (which is what the “leaders” in all countries seem to be hell-bent on doing) will probably lead to the inflexion point (Chaos theory – Malcom Caldwell?) and cause totally unexpected catastrophes from totally unexpected sources… The Law of Unintended Consequences….

  • Dev says:

    One of the most beautiful articles I have read this year. On economy as a whole.
    Brilliant work Deepak!

  • poster says:

    ha ha ha… despite the macros, noida toll bridge is a good stock… atleast imho…

  • Kshitij says:

    I believe that these macro issues repeat every few years. No nation is an island (some are in literal terms only). Even when the market was going up…………it was macro.
    Another way to look at this is- is the “micro” really that good ?
    How many new IPOs were reasonably priced?
    How many new business models were launched in India?
    How many new product and services were launched in Indian equity markets via new companies?
    Is nothing more exciting than some new pharma, construction/EPC/ engineering cos, NBFCs, IT cos, etc? What is new at micro level?
    So infact in reality, micro is a genuine problem !
    I am certain that if one genuinely had solid entrepreneurs rather than ” hair oil and soap” billionaires, there might have been strength in the market in several such stocks. Where is the innovation? Infact few innovative/ new cos are still MASSIVELY overpriced per analysts.
    One can never wish away macro……..especially when the money comes from abroad !